No one likes to pay taxes but wherever you work in the world, taxes are one certainty that you will face. Only a few countries (all in the Middle East) don’t impose income taxes, and if you earn money from a client inside a country you are obligated to file and pay taxes. (This may not be the case if you are a digital nomad working with remote clients)
International contractors may believe that because they are ex-pats with no other connection to the country, they should not have to pay taxes. But the government would claim that you are enjoying the benefits of tax revenues while you are living and working there. This can include infrastructure, security, health facilities and public recreation. Whether you agree or not, they expect you to pay taxes in their country.
Here are some of the tax mistakes contractors can make when working abroad, and suggestions on how to solve them:
Failing to File and Pay Taxes in the Country
One of the common tax mistakes is of course refusing or forgetting to file and pay taxes at all. Contractors may be tempted to think that they are under the radar and not even registered in the tax system. The problem is that you are on record as a payee of your client, so the income is visible to authorities. Also, obtaining a work permit will usually include registering a tax ID number.
Some countries even require companies (your clients) to withhold taxes from contractors as with a PAYE system, just to prevent this type of tax avoidance. Not filing or forgetting will not absolve your tax liability, and won’t be viewed favourably. If you simply leave without paying, it might not be easy to return to the country in the future.
Solution: If your failure to file wasn’t willful, you can likely file for past years. You will need an accountant to help you, and you will pay penalties and interest on past-due taxes. Intentional failure to file is known as tax fraud, with more serious consequences.
Miscalculating Tax Withholding
Many countries will require self-employed contractors to withhold and pay taxes during the year (often quarterly), so it is possible to miscalculate the right amount. This is one of those rules that is easy to overlook or make mistakes, even if you fully intend to pay income taxes.
Solution: If you use an umbrella company to facilitate your client payments, they will calculate your withholding automatically and accurately. Otherwise, you can hire an accountant, or if you go DIY and underpay you might have to add penalties and interest later when you file.
Not Accounting for Value Added Tax (VAT)
Many countries impose VAT on billed goods and services above a certain annual threshold. The VAT rate can be 10-20% so it’s not insignificant. If you come from a country like the US that does not have VAT, you may not even be aware of it.
Solution: Research the VAT rules so you know what to expect, and then add the estimated amount into your contract rates. You will have to make the VAT payments separately, as outlined by local tax rules.
Becoming an “Accidental” Tax Resident
If you don’t pay attention to the criteria, you might find yourself as an ‘accidental’ tax resident. Tax residency (typically more than a six-month stay) will mean that you are liable for taxes on worldwide income. Some contractors may be unaware of this rule, and the fact that you might have to file taxes at home as well.
An example would be if you earn income in your home country the first three months of the year, and then move to work onsite for a client abroad the rest of the year. You would have to pay tax at home on the first three months of income, and potentially pay tax again on the same income in the new country.
Solution: It is worthwhile to research the tax residency rules for the host country, as well as any tax treaties with your home country. Both of these items will determine where you pay tax and how to claim any offsets or credits. The other solution is to keep your contracts to six months or less, but then you would have to wait a while to re-enter and work again.
Overlooking Special Expat Tax Rates
One of the most common tax mistakes that most contractors is overlooking the special expat tax rate. Several countries do offer ex-pat non-residents special tax rates. These are usually a ‘flat’ tax at a lower rate, but may disallow typical business deductions. These rates are applied if you stay a short time in the country (non-resident), and you do have a choice to choose the standard progressive rates.
Solution: Research ahead of time any ex-pat tax schemes that may be available, and then calculate if the loss of business deductions is worth the lesser rate. Some contractors have high business deductions and might be better off with standard rates.
Misunderstanding the Rules on Business Deductions
Every tax code is different, and the types of deductions you are used to taking as a self-employed may not be allowed. This could lead to underestimating your tax bill, which will affect your take-home earnings.
Solution: If you are used to using business deductions to reduce taxes, then hiring a local accountant may be wise to learn the rules. If any deductions are disallowed, you might have to raise your client rates to account for a higher tax payment than expected.
Not Filing Tax Returns in the Home Country
Even if you file and pay taxes abroad, that may not mean that you don’t have to at least file a tax return at home. It will depend on your home country, how long you are abroad and where your income originates. If you need the relief of a tax treaty, you will need to file a return at home.
Solution: Determine your home country’s tax filing requirements and applicability of tax treaties if necessary.
How Contractor Taxation can help you avoid tax mistakes abroad
Contractor Taxation has a global network of umbrella companies that can help you in a new country with tax withholding and payment. You won’t have to guess if your withholding is accurate, and they will have access to local tax experts to assist you.
Other benefits of umbrella companies include:
- Manages all client payments, tax withholding and any social contributions
- Issues you a payslip each month, to a local or foreign account
- Sponsors work permits
- Helps set up the contract with the client
- Moderates any disputes with your client
- Advises on access to totalization and double taxation treaties
If you have questions about how an umbrella company can help you as an international contractor, please contact us at Contractor Taxation. We can help you avoid the risk of making tax mistakes on your contracting journey.